1. It also has the largest call-centre in


This report
analyses the IPO case study on Ctrip. The first section provides an overview of
this company, including its business structure, strategies, business
environment and its stock market conditions, etc. Ctrip is an online travel
agency and went public on December 9th, 2003, expecting to sell 4,200,000ADS at
between $16 and $18 per ADS.

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In the second
section, the discussion is based on the reason and timing that a firm goes
public, and why IPO usually is underpriced, linking with Ctrip’s situation. I
realised that the most common reason to go public it to raise funds. Timing
depends on the overall market condition. Underpricing can be explained by
asymmetric information.

In the third
section, I evaluate Rashtchy, S. and Avilio, J.’s analysis report (2004). I
first analyse the overall report. Then, I picked two forecasts to have a more
detailed evaluation: revenue contribution and profits. Finally, I review these
forecasts with my own opinion.



Ctrip is a
China-based online travel agency (OTA), which was founded in 1999 and
headquartered in Shanghai. Its core business is to provide its members with
hotel reservations, flight ticketing, packaged tours, corporate travel
management and so on. The targeted customers are business and leisure
travellers who travel alone. As other travel agencies focus on group
travelling, Ctrip has its opportunity and advantage by offering individuals
information of hotels and air-tickets and access to considerable discounts.
Ctrip also provides convenient and reliable 24-hours online and offline
services. Free memberships and its upgrade system are parts of its successful
marketing strategy. It also has the largest call-centre in Chinese travel
business with progressive customer’s relation management system (CRM) and
self-developed app.

Ctrip remains as a
leader of a consolidator of hotel accommodations and airline tickets in China
among the past 15 years with superb market shares. With its power over the
market and its cooperation with hotels and airlines, it has a considerable
influence on hotel pricing and flight ticket supplying. The revenue structure
of Ctrip is quite simple: as playing an agent between hotels and customers, it
receives brokerage by recommending customers and hotels to each other.
Meanwhile, it established platforms for advertising and other services, which
are parts of its revenue contribution.

For the past ten
years internet sector has been growing and became indispensable for daily
activity, Ctrip, an online service company, is beneficial for the technology
growth. At the same time, China has been experienced high-speed economic growth
and boosted GDP, thus, provides Ctrip with a comfortable business environment.

On December 9th,
2003, the company went public on NASDAQ. The company expected to sell 4,200,000
American Depositary Shares (ADS), which was 8,400,000 ordinary shares, in and
outside the United States at an expected public offering price between $16.00
and $18.00 per ADS with an underwriting discount of $1.26 per ADS.




and when do firms go public?


According to Brau
and Fawcett (2006), the survey shows that facilitating mergers and acquisitions
(M) is the most common motivation for going public. IPO can help the
company to create public shares for use in such activities in the future. In
their survey, it shows that IPO companies are more often an acquirer rather
than a target. They also state that IPO company would need a market price as
the starting point of acquisition progresses. Scott (1976) indicates that
conducting a public offering is a method to reduce the cost of capital. But
Brau and Fawcett’s (2006) study shows that reducing the cost of capital is
ranked quite low as a reason to go public by CFOs.

Zingales (1995)
stands for an idea that IPO would help insiders to sell their company and thus
change the proportion of their cash flow and control rights. He argues that
going public is not only a stage of corporation growth but also a channel to
simulate venture capitalist activities. In his opinion, IPO is used by initial
owners to build the optimal structure of their ownership. Going public has high
costs, yet, it is a relatively cheaper way to raise funds without increasing

According to
Pagano, Panetta, and Zingales’s study (1998), the control turnover after an IPO
is twice the normal turnover. Moreover, market-to-book ratio affects the
profitability of IPO. There is a positive relationship between market-to-book
ratio and the probability of a firming going public. Meanwhile, their study
also shows that the larger the size of a firm is, the higher the likelihood to
conduct an IPO. A firm with high growth and profit also tends to be involved in
IPO. In Ctrip’s prospectus, it shows that Ctrip’s revenues had increased from
RMB6.9 million in 2000 to RMB105.3 million (US$12.7 million) in 2002. For the
nine months ended September 30, 2003, $13.4 million revenue and US$3.5 million
net income were generated even though SARS had a strong negative effect on the
economy during the second quarter of 2003.  



Lucas and McDonald
(1990) assert that the timing of IPO would depend on the overall market
condition such as a bull market, which is called Market-timing theory. In a
bear market, the firms feel that they are undervalued; thus they will delay
their IPO timing. Meanwhile, Ritter (1991) argues in a long-term perspective
that high volume period of IPO usually are involved with poor long-run
performance, which indicates that by taking advantage of “windows of
opportunity” issuers can time IPO successfully.  

Figure 1. monthly data on aggregate U.S.
IPOs per month

Lowry and Schwert
(2002) state that statistical tests show a weak negative relationship between
IPO volume and future initial returns and a significant positive relationship
between initial returns and future IPO volume. This means that firms have a
greater incentive to go public if they realise that IPOs are significantly
underpriced. They argue that during the registration period, information keeps
being released, which will raise the expected valuation and thus the initial
returns. In this case, more companies are willing to go public after realising
the opportunity.  


is IPO underpriced?

IPO is underpriced if the
first day ends with a higher stock price than the initial offering price, thus
generating a return. The underpricing can attract the investors and offset the
risk they are taking. However, Ritter and Welch (2002) suggest that
asset-pricing risk premia cannot explain the situation as the second-day
investors do not seem to require risk premium while the risk cannot be resolved
by one day

One of the reason can be
used to explain underpricing is based on asymmetric information. As the sellers
always have better information than the buyers, investors feel unsafe and
afraid to buy a “lemon”. The lemon problem is that products are sold
only if the quality is pool. In this case, the investors fear that the issuers
sell their shares and rights due to some inside problem. Ritter and Welch
(2002) assert that the high-quality issuers set a lower-than-market price to
stop lower-quality issuers from mimicking their behaviour while low-quality
issuers sell shares at normal price. If investors have better information than
issuers, then issuers have problems to set a price that the market accepts. On
the contrast, if issuers are less informed than investors, they may underprice
their shares as they do not know the preference of investors. Asymmetric
information between the informed underwriter and uninformed issuers also leads
to underpricing as underwriters can receive higher compensation from informed
investors. Ritter and Welch (2002) state that as long as the asymmetric
information uncertainty eliminates, underpricing would disappear.

Brau and Fawcett (2006)
argue that underpricing can serve a marketing function. Demers and Lewellen
(2001) state that IPO price, same as product price, affects the demand of
quantities. Lower price can attract investors to buy the new shares. Thus,
underpricing increases the trading volume and issuers can be beneficial.
Meanwhile, underpricing can reduce marketing cost.

Another reason of
underpricing is related to “Bookbuilding”. In Hanley’s study (1993),
she finds that underwriters do not adjust share price upward along with the
high demand unless the underpricing is higher. Underwriters use bookbuilding to
gather information from informed investors. They set a preliminary offer price
range to estimate demand by recording “indications of interest from prospective
investors.” As potential investors reveal a willingness to pay a higher
price, underwriters need to offer underpricing or more IPO allocations to
compensate these investors.

Hughes and Thakor (1992)
assert that under symmetric information, underpricing is due to legal liability
reduction. A lower price has a lower possibility to be sued. However, Ritter
and Welch (2002) argue that this is not the primary reason of underpricing in
this situation.

Another explanation for
underpricing is given by Boehmer and Fisher (2001) that as evidence shows that
trading volume in the aftermarket and underpricing, underwriters can gain
additional trading revenue in a Nasdaq-listed IPO. Nevertheless, there is no a
clear clue that issuers can benefit from this underpricing explanation.





4.1 Summary of Key

increasing Chinese urban population and the move towards technologically
efficient services is one evidentiary aspect which qualifies for the investment
in China’s internet and technology-based companies. With an increasing growth
in internet usage in the world and in China, it is envisioned that the consumer
acceptability and use of e-commerce will significantly increase and the same
can be said for online travel. Additionally, Rashtchy and Avilio (2004) state
that the growth of Chinese economy has brought with it various changes not only
for the economy but also to consumer social life in which consumers in China
have shifted to individual travel. The rise of this group of independent
travellers has drawn remarkable attention from travel agencies with Ctrip at
the forefront to gain a share in the market as a result of consumers looking
for web convenience services.

at China’s travel market, then there is a reason to believe it is fragmented.
This is due to its poor booking, reservation, and fulfilment infrastructure.
Moreover, the 9,000 hotels in China with the top three hotels only accounting
for 2% of the market share having that most of the hotels are privately owned
and managed and as such lack a central reservation system similar to Europe or
the United States of America. The travel market in China has about 12,000
travel agencies and a majority of this agencies have a local focus putting most
interest on business and packaged tour travellers. This is what brings about
the observation in which no single chain has greater than 2% market share. 

to the analyst report, there is noteworthy barriers to the entry of in the
Chinese travel market. There are many licenses which are required in China for
an online agency to start its operation. The report lists air ticketing permit
as one of the requirements for every city as there is no national air ticketing
permit with Ctrip being the only organisation having a countrywide booking and
fulfilment in China (Rashtchy and Avilio, 2004). Additionally, there is the
travel agency license which is obligatory for both local and international
businesses. Within this framework, a foreign agency is only allowed to operate
in four cities in China. Similarly, the report includes the requirement of
advertisement license and internet for online businesses. Away from the
barriers to entry in the Chinese travel market, the report also points on
Chinas travel market with respect to the global travel economy which stands at
1.3 trillion dollars. According to the report, the market share of China is
expected to be at $33 billion representing 2.5% of the world’s travel market
revenue having an expected a continuous growth of around 10%.

factor contributing to the growth of the Chinese travel market has been
effectively elaborated as one of the key points in the report.  The report lists four factors which are
instrumental to the growth of the travel market is China as; China’s overall
GDP growth at about 7-10%, increasing middle-class consumers in the economy, a
continuous increase in business travel, and the increasing demand for leisure
travel. A major hurdle for the Chinese online companies is the low usage of
online payment methods, however, Ctrip has 30% online usage and imploring on
low tech methods of paid which are efficient. The report sequentially compares
the U.S online travel booking to China’s online travel booking, Ctrip has a
platform to compete in revenue generation with other U.S travel agencies given
that the China market grows at the same rate as that of United States. The
report examines the growth strategy implored by Ctrip which inculcates four key
elements; grow the user base and transaction volume, grow average commission
rate, enter merchant model, and finally implore accretive and strategic
acquisitions. Rashtchy and Avilio (2004) list many risk factors such as
competition, and potential margin or commission contraction. Competition is
brought about by the fact that the e-commerce and travel are blossoming in
China and even though Ctrip has established a leadership position, there are
new competitors establishing their brands in China.  





4.2 Evaluation of Two
Forecast by Analysts

This section of
the appraisal will critically evaluate two forecasts by analysts using
qualitative and quantitative information to substantiate the evaluation. One
forecast made by Rashtchy and Avilio (2004) predicts the revenue contribution
from each product line of Ctrip. The report provided by Rashtchy and Avilio
(2004) provides the following forecast for revenue contribution from each
product line;  

Table 1 :  revenue contribution from Ctrip product
lines    Source:
Rashtchy and Avilio (2004)

For the fourth
quarter of the year 2003, the company realises a contributory revenue from
hotel reservation of about 84% which successively brings out an average of
87.25%. For the year 2004, Rashtchy and Avilio (2004) forecast a that the
contribution on total revenue earned from hotel reservation will be 84% for the
1st quarter, 83% for the second quarter, 82% for the third quarter and 83% for
the fourth quarter. This translates to a total revenue contribution for Ctrip
company of about 83%. Analysis on the contribution from the air-ticketing
product line to the total revenue accrued by the company shows that for 2002,
the contribution stands at around 5.25%, 11.25% for the year 2003 and 14% for
the year 2004. Rashtchy and Avilio (2004), also forecast on the revenue
contribution from packaged tour product line of the company, with an
expectation of 2.5% for the year 2003 and 5.5% for the year 2004. Examining
research journal authored by Wang, Chiang and Hsieh (2015), they use data from
Ctrip Company’s provided in the table below;

Table 2: revenue
contribution from Ctrip product lines                     Source Wang et al. (2015)

The data provided by Wang et al. (2015, 166) will be
used in this section to evaluate the analyst’s report. The table below compares
the two forecast by Rashtchy and Avilio (2004) and data provided by Wang et al.

Table 3: comparison
between the two reports


Another forecast
which will be evaluated presented by Rashtchy and Avilio (2004) is the gross
profit expectation for the year 2002 to 2004. The table below represents the
analysts forecast on the gross profit for Ctrip Company for the year 2003 and


Profit in $
Million dollars assuming 8.3RMB/USSD
















Gross Profit

















4: Gross profit forecast for Ctrip                   Source: Rashtchy and Avilio

For the year 2002
the average gross profit for Ctrip Company is at $10.4 million, while the
forecast for the year 2003 stands at an average of $17.2 million and for the
year 2004, the analysts forecast predicts an average gross profit of $29.2
million. To effectively evaluate the analysts forecast adopted by Rashtchy and
Avilio, their forecast will be compared to Ctrip’s report. The table below
represents data for gross profit for the company;

Profit in Million
dollars assuming 8.3RMB/USSD

5: Gross Profit for Ctrip for the year 2002-2004                Source: Ctrip report

Through examining
the analysts’ forecast on the Gross profit realised for the year 2002, 2003 and
2004, I find that there is almost a match between the forecast and the
company’s annual report. However, the forecast for the year 2004 by Rashtchy
and Avilio (2004), predicts a gross profit of around $29.2 million, yet the
company’s annual report postulates on a $34.37 million gross profit



4.3 Revision of Forecasts

Having evaluated
the forecasts in the previous section of this paper, I will revise the
forecasts and successively propose new forecasts. For the forecast on the
percentage of revenue generated by each product line, it is more succinct to
harmonise the forecast made by the analysts. In so doing, the percentage of
revenue generated by each product line offered by the company will be less than
the projected proportion. For the year 2003, the new forecast will reduce the
fraction of revenue generated by hotel reservation to about 85% given the
company’s increase in offering other services and development of new products.
Similarly, for the year 2003 the air-ticket and packaged-tour products will
remain as they are and a column for other product lines and services will be
created to account for the reduced hotel reservation percentage contribution.
For the year 2004, hotel reservation and air-ticket percentage will be slightly
lower than the forecast provided by the analysts and similar to the year 2003 a
column for other company product line or services is created to take care of
the company’s product development programs.

 For the forecast on the gross profit
appreciated in the company for the year 2003 and 2002 will not change in the
new forecast as they get in line with the company’s annual report with a
minimal difference being witnessed between the forecast and the company’s
report. However, the forecast for the year 2004 will be more in the new
forecast when compared to the analyst forecast. For the gross profit for the
year 2004, the new forecast will have an increased gross profit expectation in
comparison to the analysts’ expectation of $29.2 million. This will ensure that
the new forecast is almost in line with the company’s annual report.



4.4 Conclusion of the case

As established in
the analysts’ report by Rashtchy and Avilio (2004), China’s leading travelling
agency is Ctrip with a product line in hotel reservation, air-ticket and
packaged tour. The travel market in China is fragmented as discussed in the
report this is due to its poor booking, reservation, and fulfilment
infrastructure. Additionally, Rashtchy and Avilio (2004) give four factors
which are instrumental to the increase such as China’s overall GDP growth at
about 7-10%, increasing middle-class consumers in the economy, a continuous
increase in business travel, and the increasing demand for leisure travel. Even
with such prospected growth in the travel market share of China, there are some
barriers which make it difficult for the entry in the Chinese travel market.
The analyst’s report lists a number of license requirements which are necessary
for an agency to establish an online business and successively penetrate the
Chinese travel market. Apart from the prospected growth and barriers to entry
in the travel market, the analysts’ report discusses some of the risk factors
such as competition, supplier risk, government intervention, and technological
issues. Having looked at the key insights about the company and the travel
market at large, I am concise to say that the price movement after the IPO is
effectively justified even though commendable changes are necessitated to
ensure a perfect justification.


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